Traditionally, a merchant who wished to sell products built a “bricks and mortar” store at a particular location. In the store, the merchant would receive payments directly from customers. Since most customers would be residents of the same country as the merchant, those customers would typically pay the merchant with the local currency. In cases where a customer would use a foreign currency, merchants would establish relationships with local banks and payment infrastructure to obtain currency conversion rates and exchange currency as needed. For example, if a Mexican merchant had a U.S. customer who wished to use U.S. dollars, the merchant would know a bank's exchange rate for Mexican pesos to U.S. dollars, could offer a price to the customer, accept payment in U.S. dollars and thereafter go to his local bank to exchange the payment to Mexican pesos.
In the above example, the merchant assumed a currency risk. Since currency exchange rates change daily, the merchant risked losing money if the next day's exchange rate yielded less Mexican pesos than before. On the other hand, if the exchange rate increased, the merchant would benefit by receiving more Mexican pesos than under the previous exchange rate. The more volatile the exchange rate, and the larger the spread of exchange rates over time, the more the merchant assumed currency risk.
In the case that a customer came back to the merchant for a refund, the merchant might refund in the local currency. However, if the customer demanded a refund in the original foreign currency, then the merchant might have to hold reserves of the foreign currency, or return to the bank to exchange local currency into the foreign currency. Either way, the merchant would be exposed to currency risk over several days.
Formerly, merchants might reduce exposure to currency risk by having a relatively low number of foreign currency transactions. For many merchants, taking on currency risk was an acceptable tradeoff for increasing their customer base. For traditional “bricks and mortar” stores, refunds were relatively rare, since foreign customers would return home, and no longer be near enough to the store to demand returns.
Presently, electronic payments systems, such as credit card infrastructure, have provided some services to support currency conversion. However, the currencies supported are limited to a set of relatively non-volatile currencies. Accordingly, potential customers resident in countries with volatile currencies may be excluded from transactions supporting currency conversion. The class of currencies excluded from these payment services, due to volatility, lack of treaty support for cross border exchange, or for other reasons are generally known as non-settlement currencies.
Regardless if a currency is a non-settlement currency or otherwise, present electronic payment systems do not maintain long term guarantees of exchange rates, such as guaranteeing a same return value in foreign currency for a returned item one week after a purchase. Thus the currency risk may be passed to the customer, thereby degrading the customer's experience when the customer receives less value for the returned item due to currency fluctuations.